Prepare a variable cost statement for a unit of each
product on the basis of :
a) the original budget;
Peer & Pear Limited is an American pharmaceutical
manufacturer of pain relief drugs founded in 1886. Its common stock
is a component of the Dew Johns Industrial Average and the company
is listed among the Fortune 500.
Despite the small size of this company, it consistently ranks
at the top of Harris Interactive?s National Corporate Reputation
Survey, ranking as the World?s most respected company by Barron?s
Magazine and was the first corporation awarded the Benjamin
Franklin Award for Public Diplomacy by the U.S State Department for
its funding of the international education programs. A suit brought
by the united states department of justice in 2010, however,
alleges that, from 1999 to 2004, the company illegally marketed
drugs to Omnicare, a pharmacy the dispenses the drugs in nursing
homes. However Peer & Pear responded that the payments were
lawful and appropriate and won the suit.
The company is located in New Jersey, USA. The consumer
division is located in Peterborough, United Kingdom. Lately, the
financial performance of the UK consumer division has not been
satisfactory. Hence management as asked the chief management
accountant to have a closer look at the UK division.
The budgeted data for the UK division for the coming year is
as follow:
Product Triptans Motilium Migraleve
Sales(in units) 150,000 180,000 120,000
? ? ?
Projected Revenue:
UK sales 2,250,000 2,160,000 1,320,000
Costs:—
Coating materials 250,000 190,000 110,000
Binder materials 500,000 530,000 250,000
Salaries & wages 600,000 480,000 240,000
Total overhead cost 975,000 900,000 540,000
Profit/Loss:— (75,000) 60,000 180,000
Based on the figures above, Peer & Pear has started a
review of the profitability line of its product portfolio.
Peer & Pear is concerned about the loss on the
Triptans line and had devised a strategy of ceasing production of
this drug and switching the spare capacity of 150,000 unites to the
production of Migraleve drug.
However by increasing the production of Migraleve, this would
mean that the fixed labour cost associated with Migraleve drag
would double, the variable labour cost would rise by 30 per cent
and its selling price would have to be decreased by ? 2.25 in order
to achieve the increased sales.
Assuming all production is sold, ceasing production of
Triptans would eliminate the fixed labour charge associated with it
and half of the fixed administration overhead apportioned to
Triptan drug.
Addition information:
1. It should be noted that 25 per cent of the salaries and
wages cost for each drug is fixed in nature.
2. The fixed administration overheads of ?
1，350，000 in total have been
apportioned to each product on the basis of units sold and are
included in the overhead costs above, all other overhead costs are
variable in nature.
Requirements:
1. Prepare a variable cost statement for a unit of each
product on the basis of :
a) the original budget;
b) if the production of Triptans drug is ceased.
2. Prepare a statement showing the total contribution and
profit for each product group on the basis of :
a) the original budget
b) if the production of Triptans drug is ceased.
3. Using your results from (1) and (2) produce a report (up
to 1,000 words) advising the firm?s Managing Director whether
Tripatans drug should be deleted from the product portfolio, giving
reasons for your decision. You need to consider ACADEMIC
LITERATURE, such as journals and articles when laying out your
documents.
4. Critical analyse other non-financial factors that should
be considered by the company before considering the deletion of the
Triptan drug from product portfolio.
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